executive summary
TRANSCRIPT
Forecast of the gold fixing price(February 2015 – September 2015)
Lamar, MartinResearch Assistant
Executive Summary
This report will provide a forecast of the monthly gold fixing price in the London Bullion Market for the time period February 2015 through September 2015. The CME group owns and operates large derivatives and futures exchanges in New York and Chicago. The exchange traded derivative contracts they conduct business with include rare and precious metals. The most important results are as follows:
One year prior to our forecast, the price of gold was decreasing from Feb 2014 – September 2014, during this same time period in 2015 our forecast for the monthly benchmark price of gold shows an increasing price over the sample time frame.
The following regression forecast model is used:Gold_pricet = β1return_on_DIXt + β2return_on_s_pt + β3term_premiumt + Ɛt
Table 1: Previous Year Actual and Forecast Values For All Variables (Feb 2014 – September 2015)
Previous Year Values
Gold Price
Monthly
Return on DIX
Monthly
Return on S&P
Term Premiu
m
Forecast
Dates
Forecast of the
Price of Gold
Forecast of
Monthly
Return on DIX
Forecast of
Monthly
Return on S&P
Forecast of
Term Premiu
m
Feb-14 1300.98 -0.43% 0.69% 2.66 Feb-15 1251.96 1.88% 1.21% 1.86
Mar-14 1336.08 -0.32% 0.62% 2.67 Mar-15 1254.80 2.08% 1.21% 1.86
Apr-14 1299.00 -0.18% 2.10% 2.67 Apr-15 1257.05 2.09% 1.22% 1.87
May-14 1287.53 0.28% 1.91% 2.53 May-15 1259.29 2.10% 1.22% 1.88
Jun-14 1279.10 -0.17% -1.51% 2.56 Jun-15 1261.53 2.12% 1.22% 1.88
Jul-14 1310.97 1.60% 3.77% 2.51 Jul-15 1263.77 2.13% 1.23% 1.89
Aug-141295.9
9 2.64% -1.55% 2.39 Aug-15 1266.02 2.15% 1.23% 1.90
Sep-141238.8
2 1.55% 2.32% 2.51 Sep-15 1268.26 2.16% 1.23% 1.90
*Gold Price (monthly fixing price in London Bullion Market) data is measured in U.S. dollars per troy ounce and is taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis
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https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.*Monthly Return on DIX (monthly return on trade-weighted dollar index) is measured in monthly return percentage of trade weighted dollars and is taken from Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Major Currencies, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/DTWEXM/, April 16, 2015.*Term Premium is measured in percentage yield and is representative of the spread between long term government bonds and T-bill rates and is taken from Organization for Economic Co-operation and Development, Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United States©, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/IRLTLT01USM156N/, April 16, 2015.*Forecast values for predictor (RHS) variables calculated using Holt’s exponential smoothing.*Charles C. Holt, “Forecasting Seasonals and Trends by Exponentially Weighted Moving Averages,” International Journal of Forecasting, Vol. 20, No. 1, 2004, pp 5-10.
Figure 1: London Bullion Market Gold Fixing Price: Actual vs. Forecast (Jan 1973 – September 2015)
Jan-73Jan-76
Jan-79Jan-82
Jan-85Jan-88
Jan-91Jan-94
Jan-97Jan-00
Jan-03Jan-06
Jan-09Jan-12
Jan-150.000
200.000
400.000
600.000
800.000
1000.000
1200.000
1400.000
1600.000
1800.000
2000.000
gold forecastgold actual
Month
U.S.
Dol
lars
per
Tro
y O
unce
*Actual gold fixing price taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.*Forecast price of gold fixing price is calculated using the regression model reported in table 10.
During the period January 1973 – September 2015, the regression model has an average of about plus or minus 17 U.S. dollars per troy ounce.
During the period January 1973 – September 2015, the regression model has an average of about plus or minus 4%.
During the period January 1973 – September 2015, about 99% of the variation in the monthly gold fixing price can be explained by the regression model found in table 10.
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Table 2: Gold Fixing Price Forecast(Jan 1973 – September 2015)
Regression Forecast Model
MAE 17.119MAPE 3.566RMSE 27.708Thiel’s U
0.022
Gold fixing price is expected to have a negative relationship with the monthly return on the trade-weighted dollar index. The trade weighted dollar index is a measure of the value of the US dollar compared to other currencies. In the past, gold was used to value the US dollar, as it tends to be more stable when compared to other currencies. The price of gold in US dollars tends to reflect consumer confidence in the currency, thus causing an inverse relationship.
Based upon a hypothesis test from the data reported in table D-3, there is positive relationship between the gold fixing price and the monthly return on the trade-weighted dollar index. If the monthly return percentage increases by 1%, the gold fixing price will increase by 331.84 U.S. dollars per troy ounce. Future values for this predictor were calculated using Holt’s exponential smoothing.
Gold fixing price is expected to have a negative relationship with the monthly return on the index for the S&P 500. As previously stated, gold tends to retain its value in times of economic stress. When equity returns are low, and there is general uneasiness in the stock market, investors tend to put their money in gold as a hedge. Therefore, as monthly returns on the S&P 500 rise, the demand for gold is more likely to drop, therefore implying an inverse relationship.
Based upon a hypothesis test from the data reported in table D-3, there is positive relationship between the gold fixing price and the monthly return on the S&P 500 index. If the monthly return percentage increases by 1%, the gold fixing price will increase by 38.09 U.S. dollars per troy ounce. Future values for this predictor were calculated using Holt’s exponential smoothing.
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Gold fixing price is expected to have a positive relationship with the term premium. The term premium is the return of long term government bonds minus short term bonds (T-bills). The flow of risk-adverse money from “safe havens” like T-bills to government bonds can have a significant impact on bond yields overall. Sequentially, this can have an effect on the equity market, which as previously stated also affects the price of gold.
Based upon a hypothesis test from the data reported in table D-3, there is positive relationship between the gold fixing price and the yield on term premiums. If the yield percentage increases by 1%, the gold fixing price will increase by 5.88 U.S. dollars per troy ounce. Future values for this predictor were calculated using Holt’s exponential smoothing.
Recommendation: Over the course of February 2015 – September 2015, the price of gold is forecasted to increase over time. Based on this sample’s evidence, it is our recommendation that the CME group buys shares in the gold equity market, or invest in the physical commodity to maximize its return.
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Appendix
Figure A-1: London Bullion Market Gold Fixing Price (Jan 1973 – Jan 2015)
Jan-73Jan-75
Jan-77Jan-79
Jan-81Jan-83
Jan-85Jan-87
Jan-89Jan-91
Jan-93Jan-95
Jan-97Jan-99
Jan-01Jan-03
Jan-05Jan-07
Jan-09Jan-11
Jan-13Jan-15
0.000
200.000
400.000
600.000
800.000
1000.000
1200.000
1400.000
1600.000
1800.000
2000.000
Month
U.S.
Dol
lars
per
Tro
y O
unce
*Data taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.
Figure A-2: Monthly Return on Trade Weighted Dollar Index (Jan 1973 – Jan 2015)
Jan-73Jan-76
Jan-79Jan-82
Jan-85Jan-88
Jan-91Jan-94
Jan-97Jan-00
Jan-03Jan-06
Jan-09Jan-12
Jan-15-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Month
Trad
e-w
eigh
ted
Dolla
rs(m
onth
ly re
turn
%)
*Data taken from Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Major Currencies, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/DTWEXM/, April 16, 2015.
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Figure A-3: Monthly Return on S&P 500 Index (Jan 1973 – Jan 2015)
Jan-73Jan-76
Jan-79Jan-82
Jan-85Jan-88
Jan-91Jan-94
Jan-97Jan-00
Jan-03Jan-06
Jan-09Jan-12
Jan-15-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
Month
Inde
x Po
ints
(mon
thly
retu
rn %
)
*Data taken from S&P 500 (^GSPC) (2015). Profile, business summary. Yahoo!Finance. Retrieved from https://finance.yahoo.com/q?s=^GSPC
Figure A-4: Term Premium (Jan 1973 – Jan 2015)
Jan-73Jan-75
Jan-77Jan-79
Jan-81Jan-83
Jan-85Jan-87
Jan-89Jan-91
Jan-93Jan-95
Jan-97Jan-99
Jan-01Jan-03
Jan-05Jan-07
Jan-09Jan-11
Jan-13Jan-15
-4
-3
-2
-1
0
1
2
3
4
5
Month
Inde
x Po
ints
(yie
ld %
)
*Data taken from Organization for Economic Co-operation and Development, Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United States©, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/IRLTLT01USM156N/, April 16, 2015.
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Table B-1: Descriptive Statistics (Jan 1973 – Jan 2015)
GOLD DIX RSP TPMean 507.29 -0.02% 0.68% 1.74Median 381.36 0.05% 0.96% 1.94Mode 299.1 N/A N/A 2.5Standard Deviation 387.81 1.71% 4.45% 1.30Skewness 1.75 -1.96% -46.27% -0.64Minimum 65.139 -5.25% -21.76% -2.8Maximum 1771.85 6.68% 16.30% 4.34Count 505 505 505 505
*GOLD (London Bullion Market Gold Fixing Price) data is measured in U.S. dollars per troy ounce and is taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.*DIX (monthly return on Trade weighted U.S. dollar index for major currencies) is measured in monthly return percentage trade weighted dollars and is taken from Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Major Currencies, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/DTWEXM/, April 16, 2015*RSP (monthly return on the s/p 500) is measured in monthly return percentage for index points and are representative of the U.S. equity market and is taken from S&P 500 (^GSPC) (2015). Profile, business summary. Yahoo!Finance. Retrieved from https://finance.yahoo.com/q?s=^GSPC*TP (Term premium) is measured in percentage yield and is representative of the spread between long term government bonds and T-bill rates and is taken from Organization for Economic Co-operation and Development, Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United States©, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/IRLTLT01USM156N/, April 16, 2015.
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Table B-2: London Bullion Market Gold Fixing Price (Jan 1973 – Jan 2015)
150 450 750 1050 1350 16500
50
100
150
200
250
300
U.S. Dollars Per Troy Ounce
Freq
uenc
y
*Data taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.
Table B-3 : Monthly Return on Trade Weighted Dollar Index (Jan 1973 – Jan 2015)
-4.5 -1.5 1.5 4.5 7.50
50
100
150
200
250
300
Trade-weighted Dollars(monthly return %)
Freq
uenc
y
*Data taken from Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Major Currencies, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/DTWEXM/, April 16, 2015.
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Table B-4: Monthly Return on S&P Index ( Jan 1973 – Jan 2015)
-25% -15% -5% 5% 15%0
50
100
150
200
250
300
350
Monthly Return %
Freq
uenc
y
*Data taken from S&P 500 (^GSPC) (2015). Profile, business summary. Yahoo!Finance. Retrieved from https://finance.yahoo.com/q?s=^GSPC
Table B-5: Term Premium (Jan 1973 – Jan 2015)
-2.25 -0.75 0.75 2.25 3.750
50
100
150
200
250
Spread Yield
Freq
uenc
y
*Data taken from Organization for Economic Co-operation and Development, Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United States©, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/IRLTLT01USM156N/, April 16, 2015.
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Figure C-1: London Bullion Market Gold Fixing Price & Trade Weighted Dollar Index (Jan 1973 – Jan 2015)
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00%0.000
200.000
400.000
600.000
800.000
1000.000
1200.000
1400.000
1600.000
1800.000
2000.000
Monthly Return on Trade-weighted Dollar Index(Monthly Return %)
Lond
on B
ullio
n M
arke
t(U
.S. D
olla
rs P
er T
roy
Oun
ce)
*London Bullion Market Gold Fixing prices are taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.*Monthly return percentage data on Trade weighted dollar index is taken from Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Major Currencies, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/DTWEXM/, April 16, 2015.
Figure C-2: London Bullion Market Gold Fixing Price & Monthly Return on S&P Index
(Jan 1973 – Jan 2015)
-25.00%
-20.00%
-15.00%
-10.00%-5.00%
0.00%5.00%
10.00%15.00%
20.00%0.000
200.000400.000600.000800.000
1000.0001200.0001400.0001600.0001800.0002000.000
Monthly Return on S&P Index(Monthly Return %)
Lond
on B
ullio
n M
arke
t Gol
d Fi
Pric
e(U
.S. D
olla
rs P
er T
roy
Oun
ce)
*London Bullion Market Gold Fixing prices are taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis
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https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.*Monthly return percentage data on the S&P 500 is taken from S&P 500 (^GSPC) (2015). Profile, business summary. Yahoo!Finance. Retrieved from https://finance.yahoo.com/q?s=^GSPC
Figure C-3: London Bullion Market Gold Fixing Price & Term Premium (Jan 1973 – Jan 2015)
-4 -3 -2 -1 0 1 2 3 4 50.000
200.000
400.000
600.000
800.000
1000.000
1200.000
1400.000
1600.000
1800.000
2000.000
Term Premium(Spread % yield)
Lond
on B
ullio
n M
arke
t Gol
d Fi
Pric
e(U
.S. D
olla
rs P
er T
roy
Oun
ce)
*London Bullion Market Gold Fixing prices are taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.*Term Premium data taken from Organization for Economic Co-operation and Development, Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United States©, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/IRLTLT01USM156N/, April 16, 2015.
Table D-1: Correlation of Variables (Jan 1973 – Jan 2015)
Gold Price Return on DIX Return on S&P Term PremiumGold price 1Return on DIX 0.07 1Return on S&P 0.04 -0.15 1Term Premium 0.19 -0.05 0.04 1
*Correlations are calculated based on actual values for the time period Jan 1973 – Jan 2015.
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Table D-2: Hypothesis Test for Seasonality in the Monthly Gold Fixing Price
Wald Test of H0: β4 = β5 = …= β15 versus Ha: at least one β is different. Based upon the regression model reported in table D-3.
Table D-3: London Bullion Market Gold Fixing Price (January 1973 – September 2015)
*C (London bullion market gold fixing price) is measured in U.S. dollars per troy ounce and is taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.*RETURN_ON_DIX (monthly return % on trade-weighted dollar index) is measured in monthly return percentage and is taken from Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Major Currencies [DTWEXM], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/DTWEXM/, April 16, 2015.*RETURN_ON_S_P (monthly return % on the S&P 500 index) is measured in monthly return percentage for index points and is taken from S&P 500 (^GSPC) (2015). Profile, business summary. Yahoo!Finance. Retrieved from https://finance.yahoo.com/q?s=^GSPC*TERM_PREMIUM is measured in percentage yield and is representative of the spread between long term government bonds and T-bill rates and is taken from Organization for Economic Co-operation and Development, Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United States©, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/IRLTLT01USM156N/, April 16, 2015.
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Figure E-1: London Bullion Market Gold Fixing Price (January 1973 – Jan 2015)
*Data taken from London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.
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Figure E-2: Correlogram of Residuals (January 1973 – September 2015)
*Residuals are from the regression model summarized in table D-3.
References
14
Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index:
Major Currencies, retrieved from FRED, Federal Reserve Bank of St. Louis
https://research.stlouisfed.org/fred2/series/DTWEXM/, April 16, 2015
*Charles C. Holt, “Forecasting Seasonals and Trends by Exponentially Weighted Moving
Averages,” International Journal of Forecasting, Vol. 20, No. 1, 2004, pp 5-10.
Hulbert, M. (2014, January 14). The incredible gold-interest rate correlation. Retrieved April 18,
2015, from http://www.marketwatch.com/story/the-incredible-gold-interest-rate-
correlation-2014-01-22.
LEVISOHN, B., & Silver-Greenberg, J. (2011, April 30). How to Profit from the Shrinking Dollar.
Wall Street Journal – Eastern Edition. P. B7
London Bullion Market Association, Gold Fixing Price 3:00 P.M. (London time) in London Bullion
Market, based in U.S. Dollars, retrieved from FRED, Federal Reserve Bank of St. Louis
https://research.stlouisfed.org/fred2/series/GOLDPMGBD228NLBM/, April 15, 2015.
Organization for Economic Co-operation and Development, Long-Term Government Bond
Yields: 10-year: Main (Including Benchmark) for the United States©, retrieved from
FRED, Federal Reserve Bank of St. Louis
https://research.stlouisfed.org/fred2/series/IRLTLT01USM156N/, April 16, 2015.
S&P 500 (^GSPC) (2015). Profile, business summary. Yahoo!Finance. Retrieved from
https://finance.yahoo.com/q?s=^GSPC .
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